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Competing in a global trade enviroment (Understanding the global trade…
Competing in a global trade enviroment
Key points
The reality of the global trade environment can take different forms
Buying something produced in another part of the world as a consumer
Working for a multinational company as an employee or a manager
Internationalising your firm as an entrepreneur
Global village
McLuhan
How an electronic nervous system (the Web) was rapidly integrating the planet with the effect that events in one part of the world could be experienced from other parts in real time, thus creating the human experience of living in a global village
Understanding the global trade environment
Manuel Castells - the global economy
‘An economy with the capacity to work as a unit in real time on a planetary scale'
Originated from an increase in worldwide flows of labour, goods, money, services and information
Greater interconnections
The rapid development of information and communications technologies (ICT)
Social networks
International trade
One manifestation of the global economy
Examples of events occurring in the global trade environment
Columbia selling coffee
Russia selling gas worldwide
Has also created the World Trade Organisation (WTO)
An international organisation
Aim - to foster greater worldwide openness of trade
The only international organisation dealing with the global rules of trade between nations
Function - to ensure hat trade flows as smoothly, predictably and
freely as possible
Born out of negotiations, and everything the WTO does is the
result of negotiations
General Agreements of Tariffs and Trade (GATT)
Documents that provide the legal ground rules for international commerce :
Contracts, binding governments to keep their trade policies within agreed limits
Main aim is to help producers of goods and services, exporters and importers conduct their business, while allowing governments to meet social and environmental objectives
Criticisms
They have done agreements with countries that do not respect human civil rights and the democratic processes
The existence of a global trade environments doesn't mean that national, regional and local differences don't matter anymore - it has in fact strengthened 'glocalisation'
The importance of the local, regional, national and
supranational levels also in the global trade environment.
Local
The resurgence of demand for local products
Goods are typically handmade in a specific territory
EG - the soaring demand for artisan beers in Britain
and the USA
Supernational
Agreements
North American Free Trade Area (NAFTA)
European Monetary Union (EMU)
Demonstrate we are not in a perfectly globalised trade environments because the alliance of countries still pays an important role in the global economy
Competition and trade among countries
Comparitive advanatage
Theory of
absolute comparative advantage
Developed by Adam Smith in 1776
Basic assumption
If a country can supply a good at a cheaper price than other countries it is better that the other countries buy the good from the country able to supply it at a cheaper price
Theory of
relative comparative advantage
Developed by David Ricardo in 1819
Assumption
A country will tend to specialise in the production of the good in which it have a relative comparative advantage
Argued that in the production decisions between two countries, the most determinant factor is the price difference existing in the production of different goods.
The existence of a global trade environment should lead each country to specialise in the production in which it is relatively more efficient.
Evaluation
Helps us to understand how countries can gain from global trade by specialisation
Why do countries have a comparative advantage in some goods and/or services rather than in others?
Why do some countries provide an economic context that enables organisations to grow and perform better and faster?
The diamond model
Michael Porter (1990)
Highlighted that the competitiveness of a country depends not only on the availability and quality of factor conditions (as pointed out in the theory of absolute and comparative advantage), but also on
The demand conditions in the country for that specific industry
The strategies, structure and rivalry of firms within the industry
The quality of related and supporting industries and infrastructures
The competitive advantage of nations, and more specifically of
some specific industries operating in some specific nations (eg Silicon Valley) can be better interpreted as the outcome of the interlinked effects of the four factors presented in Porter’s diamond model
Factor conditions
Eg natural resoruces
Demand conditions
In the country for that specific industry
Structure of firms and rivalry
Of firms within the industry
Related and supporting industries
And infrastructures
Beyond the 4 factors
The role played by the government is very relevant
Governments can influence all the four factors through a variety of actions
Distributing subsidies
Providing good infrastructures
Applying favourable tax conditions
Ensuring effective educational policies in order to improve skills of the labour force
See Book 2 p 13
All the countries are characterised by 'differences in national values, culture, economic structures, institutions, and histories [that] all contribute to competitive success
Competition among business organisations
Competition is not only occurring among countries
Business organisations need to carefully identify their competitors and the nature of competition existing in the global trade environment
Meeting customer needs and expectations is indeed not enough if competitors can do it better
Porters 5 forces (1980)
Developed earlier than the diamond model
Diamond was analysis on a national level - this is industry level
A tool used by business organisations to assess their competitive position and market attractiveness
See model Book 2 p15
The forces
Direct industry competitors
Firms that offer the same type of product in the market
Suppliers
Firms from which a business organisation purchases all the materials (raw materials and semi-finished products), needed to carry out the production process and/or to offer the services that it provides to customer
Buyers
Customers of the business organisation
Potential entrants
Concurrent organisations that may want to enter the market in which the business organisation operates
Substitute goods and/or services
Goods and/or services that in a different way can meet the same customer needs served by a given business organisation